Wouldn't it be great if you could be certain there was no risk at all before taking the plunge into property development?
If you think that's possible, then I have a bridge I can sell you...
I get it. Property Development involves risk, and we'd all sleep better at night if that wasn't the case. But that doesn't mean you have to put everything on the line to make a deal happen either.
So what can you do to deal with risk?
There's an example I like to use when I'm talking about risk - crossing the road.
When you're very little, crossing the road is incredibly dangerous. You have no idea about road rules, and chances are if your ball rolls out onto a road you'll chase after it without a moment's hesitation.
Parents know this, so they will hold your hand to cross the road, and supervise you when you're playing.
As you get older, you start to understand that cars are big and scary, and you don't want to get hit by one. You get taught to stop at the kerb, look to the right, look to the left, look to the right again...
Is anyone else having flashbacks right now? As a kid I certainly sang along with Hector the Cat teaching us how to cross the road safely!
And that's the important point - we learnt how to cross the road SAFELY. We reduced the risk.
The car on the road didn't change. It was still big and scary, and perfectly capable of killing us, just the same as when we were a toddler.
What changed is that we changed our behaviour and the risk was massively reduced.
So let's break reducing risk into three separate elements.
Identifying the Risk
Now, I'm not going to lie - it's basically impossible to identify every risk that could potentially affect a property development project. Covid, anyone? But what you CAN do is identify the most common ones.
First up, location. If you've followed me for more than a few minutes, then you've probably heard me talking about being an Area Expert. The success of a development is often tied to its location.
You should understand things about the area such as:
And about the site itself:
I could go on, but that's a good start.
Next up is financial risk. And yes, that involves doing a feasibility study on the proposed development. Knowing the numbers is absolutely vital. And I mean real numbers - not imaginary ones that make the bottom line look good. Tweaking things to get the result you want is never a good idea.
I know you can't have exact numbers on day one, but with research you should be able to put together a reasonable set of ball park figures. Include development costs, financing options, marketing, and potential returns.
You should also account for potential revenues and establish a reasonable return on investment (ROI). And by identifying a clear break-even point, you can better gauge the project's viability.
Manage The Risk
Now that you've identified the core risks in the project, it's time to work out how to manage those risks.
A skilled and experienced team can significantly reduce the risks associated with your property development project. Engaging the right professionals ensures that the project is guided by expertise at every stage.
The size of your team will depend on the size of your project, but there are a few core team members who are vital for reducing risk on your project. Check out my article "The Importance of Building a Great Team" for a detailed breakdown.
First up are planners, engineers, designers/architects and surveyors/certifiers. These professionals ensure the design is compliant with regulations and feasible given the physical characteristics of the site. A well-designed project can help maximize returns and avoid costly redesigns.
Legal assistance can range from preparing documentation and reviewing contract documents through to disputes. Having a qualified legal advisor who specializes in property development can prevent minor issues escalating into major legal battles.
And because numbers matter, a development savvy accountant is also a key member of your team.
Now that you have your team assembled, you can work with them to address all the different risks you identified and put in place ways to reduce or remove those risks.
Manage The Plan
The third part is the easiest - manage everything you've put in place. Your team might be the ones executing the plan, but you need to have oversight of all the different pieces and make sure it all comes together in order to reduce risk as much as you can.
Remember, too, the importance of things like insurance and contingency funds. You're in charge, so these are your responsibility, and form part of managing the risk plan.
You also need to keep an eye on changes in laws, taxes, and property regulations that could affect your project.
Remember, remain nimble in your approach if things do change. And be flexible in your pricing strategy and be prepared to adjust your approach based on market fluctuations.
For example, if the market conditions change, you might need to shift to a rental model or postpone the sale until the market recovers.
By integrating this three level approach, you can reduce the impact of risks in property development, while staying flexible and prepared for unexpected challenges.
If you think that's possible, then I have a bridge I can sell you...
I get it. Property Development involves risk, and we'd all sleep better at night if that wasn't the case. But that doesn't mean you have to put everything on the line to make a deal happen either.
So what can you do to deal with risk?
There's an example I like to use when I'm talking about risk - crossing the road.
When you're very little, crossing the road is incredibly dangerous. You have no idea about road rules, and chances are if your ball rolls out onto a road you'll chase after it without a moment's hesitation.
Parents know this, so they will hold your hand to cross the road, and supervise you when you're playing.
As you get older, you start to understand that cars are big and scary, and you don't want to get hit by one. You get taught to stop at the kerb, look to the right, look to the left, look to the right again...
Is anyone else having flashbacks right now? As a kid I certainly sang along with Hector the Cat teaching us how to cross the road safely!
And that's the important point - we learnt how to cross the road SAFELY. We reduced the risk.
The car on the road didn't change. It was still big and scary, and perfectly capable of killing us, just the same as when we were a toddler.
What changed is that we changed our behaviour and the risk was massively reduced.
So let's break reducing risk into three separate elements.
Identifying the Risk
Now, I'm not going to lie - it's basically impossible to identify every risk that could potentially affect a property development project. Covid, anyone? But what you CAN do is identify the most common ones.
First up, location. If you've followed me for more than a few minutes, then you've probably heard me talking about being an Area Expert. The success of a development is often tied to its location.
You should understand things about the area such as:- growth potential
- population trends
- market trends
- planned infrastructure
- local amenities
And about the site itself:
- proximity to schools
- proximity to shopping centres
- proximity to transportation hubs
- zoning
- overlays
I could go on, but that's a good start.
Next up is financial risk. And yes, that involves doing a feasibility study on the proposed development. Knowing the numbers is absolutely vital. And I mean real numbers - not imaginary ones that make the bottom line look good. Tweaking things to get the result you want is never a good idea.
I know you can't have exact numbers on day one, but with research you should be able to put together a reasonable set of ball park figures. Include development costs, financing options, marketing, and potential returns.
You should also account for potential revenues and establish a reasonable return on investment (ROI). And by identifying a clear break-even point, you can better gauge the project's viability.
Manage The Risk
Now that you've identified the core risks in the project, it's time to work out how to manage those risks.
A skilled and experienced team can significantly reduce the risks associated with your property development project. Engaging the right professionals ensures that the project is guided by expertise at every stage.
The size of your team will depend on the size of your project, but there are a few core team members who are vital for reducing risk on your project. Check out my article "The Importance of Building a Great Team" for a detailed breakdown.
First up are planners, engineers, designers/architects and surveyors/certifiers. These professionals ensure the design is compliant with regulations and feasible given the physical characteristics of the site. A well-designed project can help maximize returns and avoid costly redesigns.Legal assistance can range from preparing documentation and reviewing contract documents through to disputes. Having a qualified legal advisor who specializes in property development can prevent minor issues escalating into major legal battles.
And because numbers matter, a development savvy accountant is also a key member of your team.
Now that you have your team assembled, you can work with them to address all the different risks you identified and put in place ways to reduce or remove those risks.
Manage The Plan
The third part is the easiest - manage everything you've put in place. Your team might be the ones executing the plan, but you need to have oversight of all the different pieces and make sure it all comes together in order to reduce risk as much as you can.
Remember, too, the importance of things like insurance and contingency funds. You're in charge, so these are your responsibility, and form part of managing the risk plan.
You also need to keep an eye on changes in laws, taxes, and property regulations that could affect your project.
Remember, remain nimble in your approach if things do change. And be flexible in your pricing strategy and be prepared to adjust your approach based on market fluctuations.
For example, if the market conditions change, you might need to shift to a rental model or postpone the sale until the market recovers.
By integrating this three level approach, you can reduce the impact of risks in property development, while staying flexible and prepared for unexpected challenges.
